Lending performance of banks is challenged

Posted on Tuesday 9 April 2013 byUlster Business

Enterprise Minister Arlene Foster with EAG chair Kate Barker.

The Economic Advisory Group (EAG), chaired by Kate Barker, following consultations with the business community and after discussion with the Minister, Arlene Foster, decided during 2012 to undertake a review of the Access to Finance for local business.

The review has been published and makes 13 different recommendations for actions by Government, banks and other stakeholders which are designed to improve the availability of finance for businesses.

The review started with a range of reported perceptions. High on the agenda were the many and diverse perceptions that there is an inadequate supply of finance available and that business growth is unduly restrained. Making a contrasting argument, the banking community argued that they were ready to lend to viable business propositions.

The EAG has published a competent and extensive review of the characteristics of the demand for, and supply of, finance for business in Northern Ireland ranging from bank lending to sources of equity and debt funding as well as the expanding range of funding schemes being developed by Invest NI.

A critical constraint faced by the EAG was the refusal by the commercial banks operating in Northern Ireland to allow the EAG to publish, even in aggregate form, information on the changing scale of bank lending to businesses in recent years.

The critical feature that was acknowledged was that local lending has been decreasing.

The inability of the EAG to quote quantitative evidence has pushed the review authors into a well presented but essentially qualitative discussion. There is no surprise that the EAG recommends that this information gap should be corrected.

The Review examines a wide range of questions on the impact of the local commercial banks in the economy and points to a number of deficiencies, including an organisational problem in implementing the Bank of England Funding for Lending Scheme, where only the Ulster Bank (as part of RBS) is actively involved.

The EAG, as a quasi-official group, has dealt with the local banks with polite but restrained criticism.

The formal result is that, in a Review of Access to Finance, there are no statistics on the amount of outstanding lending to business and only a little reference to the admittedly increased costs of borrowing. The banks which are authorised to operate in Northern Ireland, although three of the main groups are headquartered outside Northern Ireland, have responded (at best) minimally to legitimate questions.

ACCOUNTABILITYOne of the areas which the Review does not explore is a more formal role for the devolved Government in these topics. Because banking is not devolved, nominally the Bank of England and HM Treasury have responsibly to ensure banks in Northern Ireland comply with UK policies. In reality, this linkage is working poorly both because the Bank of England has only modest influence here and also, equally significant, the banks with external headquarters are permitted to operate with little local accountability.

In a renegotiation of the relationships and responsibilities of banks which are headquartered outside Northern Ireland perhaps the Westminster Government, acting on behalf of the devolved Northern Ireland administration, might remind these banks that the privilege of operating from an external base also brings the profitable privilege of note issuing authority. A little persuasion that they should co-operate more readily with the Minister of Finance would be logical.

Seven of the 13 recommendations from the Review push for an increased role by local departments by touching on improving the effectiveness of the devolved institutions, particularly the Departments of Finance & Personnel (DFP) and Enterprise, Trade and Investment (DETI).

These departments are asked to consider how the EFG (Enterprise Finance Guarantee) scheme should be strengthened to encourage greater local take-up. In addition, the Bank of England should be asked to allow the benefits of the FLS (Funding for Lending Scheme) to be available through all the locally operating banks.

In a reference to a problem which looms larger in Northern Ireland than in England, the departments are asked to get involved with the banks to better understand the extent to which the banks and businesses are being affected by property debt exposure and how the overhang should be handled. This feature is well documented from the wide ranging business survey.

Three of the recommendations are directed to DETI or Invest NI. In different strands, each asks for a reassessment of the scale and form of local non-grant funds - including venture capital and equity finance - provided from Invest NI.

In a final 13th recommendation, the Review underscores the conclusion that local departments should have an acknowledged stronger influence. DFP and DETI are asked to engage with those at Whitehall responsible for developing proposals to set up a new business bank to support the more extensive proposals and to ensure that "its design is appropriate and relevant to the needs of small businesses in Northern Ireland."

COLLECTING THE EVIDENCEThe EAG Review is well researched and persuasively presented. Although the banks proved restrictive in offering useful public evidence, much interesting evidence has emerged of the nature of the demand for finance and the gaps as experienced in a large sample survey of small and medium sized enterprises (SME).

Also in a helpful compilation the authors have brought together in a single document a comprehensive statement of a wide range of funders and funding opportunities, with the exception of the constrained information from the banks.

A recurrent theme in parts of the Review is whether the survey evidence justifies, statistically, the perception that SMEs are facing a shortage of funds, particularly from banks, or are coping with an unhelpful level of loan refusals or deterrents to even asking for loans.

There is a diverse range of replies to a well-structured interview questionnaire.

Minimising the scale of a shortage of funds, the survey shows that only 8% of SMEs applied for a bank loan in 2012. Of the applicants 69% were wholly or partially successful. Of the small number of refusals, half were for conventional banking reasons such as poor credit rating or potentially risky business. Other refusals were from changes in bank lending policy or because the rates were too high. On this evidence, the banks would take some comfort.

There is, however, a more selective analysis that is less reassuring.

The success rate in seeking bank finance was only 16% for 'medium' sized firms and these are more likely to be the growth businesses. Also, around one fifth of all SMEs who made an informal approach to a bank did not proceed and this filtering out of possible requests is a concern. One fifth of medium sized firms were carrying a recent property related debt - another acknowledged deterrent feature.

In an inconclusive part of the Review, the authors asked whether the evidence could support a suggestion of market failure in the provision of assess to finance for businesses. Several pointers confirm that there are, or have been, unique features of the local market. However, the Review stops short of saying that there is a proven market failure although it does raise room for doubt.

The EAG deserves congratulations for a competent discussion. The recommendations now need to be implemented. The doubt remains on whether the banks and the supervisory authorities of the banks will be sufficiently motivated to play a more pro-active part in improving the access to finance by local businesses.

The EAG now inherits a continuing responsibility to stimulate positive action.